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Credit Frictions in the Great Recession

Author

Listed:
  • Patrick J. Kehoe

    (Stanford University
    Federal Reserve Bank of Minneapolis)

  • Pierlauro Lopez

    (Federal Reserve Bank of Cleveland)

  • Virgiliu Midrigan

    (New York University)

  • Elena Pastorino

    (Hoover Institution
    Stanford University)

Abstract
Although a credit tightening is commonly recognized as a key determinant of the Great Recession, to date, it is unclear whether a worsening of credit conditions faced by households or by firms was most responsible for the downturn. Some studies have suggested that the household-side credit channel is quantitatively the most important one. Many others contend that the firm-side channel played a crucial role. We propose a model in which both channels are present and explicitly formalized. Our analysis indicates that the household-side credit channel is quantitatively more relevant than the firm-side credit channel. We then evaluate the relative benefits of a fixed-sized transfer to households and to firms that improves each group’s access to credit. We find that the effects of such a transfer on employment are substantially larger when the transfer targets households rather than firms. Hence, we provide theoretical and quantitative support to the view that the employment decline during the Great Recession would have been less severe if instead of focusing on easing firms’ access to credit, the government had expended an equal amount of resources to alleviate households’ credit constraints.

Suggested Citation

  • Patrick J. Kehoe & Pierlauro Lopez & Virgiliu Midrigan & Elena Pastorino, 2020. "Credit Frictions in the Great Recession," Discussion Papers 2031, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2031
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Moser, Christian & Saidi, Farzad & Wirth, Benjamin & Wolter, Stefanie, 2020. "Credit Supply, Firms, and Earnings Inequality," MPRA Paper 100371, University Library of Munich, Germany.
    2. Becard, Yvan & Gauthier, David, 2021. "Banks, shadow banks, and business cycles," Bank of England working papers 907, Bank of England.
    3. Ray C. Fair, 2020. "Analysis of Nine U.S. Recessions and Three Expansions," Cowles Foundation Discussion Papers 2260R, Cowles Foundation for Research in Economics, Yale University, revised Jan 2021.
    4. M Alper Çenesiz & Luís Guimarães, 2022. "The cyclicality of job search effort in matching models [Labor supply in the past, present, and future: a Balan ced-Growth perspective]," Oxford Economic Papers, Oxford University Press, vol. 74(4), pages 1195-1213.
    5. Deimantė Teresienė & Greta Keliuotytė-Staniulėnienė & Rasa Kanapickienė, 2021. "Sustainable Economic Growth Support through Credit Transmission Channel and Financial Stability: In the Context of the COVID-19 Pandemic," Sustainability, MDPI, vol. 13(5), pages 1-34, March.

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    More about this item

    Keywords

    Credit Constraints; Collateral Constraints; Great Recession; Financial Recession; Government Transfers;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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